One of the most daunting fears taxpayers face is the IRS audit. There is serious trepidation when tax returns are filed and a sigh of relief when either the money owed is accepted or a refund is made as indicated on the year's tax return form. Those who have been through it know that receiving a letter in the mail from the IRS shakes you to the core.
One consolation: Anybody and everybody can be audited, and if you are one of the unlucky ones, it doesn't mean you'll be on the losing end. Some (although not many) people who are audited even receive unexpected returns. Most audits are done by mail and usually begin with an ominous envelope in your mailbox saying that an adjustment is due.
Many people think that once the current year's filing is accepted and payment or refund is made they are safe from being audited, but the unfortunate truth is that the IRS can go back and revisit activity three to six years prior. Make sure that you keep your files, including substantiating receipts, for at least six years. If you haven't been filing yearly returns then the audit period can go back even further. While you may not end up needing all your paperwork from the last six years, it is still a good idea to keep indefinite proof of sold investments and property.
Here are some more tips to keep you in the clear if you find yourself up for auditing by the IRS.
Rule No. 1: Never ignore a letter from the IRS.
Rule No. 2: Pay the amount the IRS says you owe, even if you plan to fight it. If you do not pay, even if you eventually win, fines and penalties will be imposed and you could be looking at a substantial amount.
Rule No. 3: If you used a professional tax preparer, contact them. They may be able to offer you helpful guidance in making your appeal, or they might help clarify an issue for you.
Rule No. 4: If you plan to appeal, you must file a request for an appeals conference with a local IRS appeals office. Follow the directions in the letter you received.
Rule No. 5: Do not ever try to bribe an IRS representative.
Rule No. 6: There are strict time limits that you need to file requests (usually 90 days) between any subsequent steps for appeals.
IRS Publication 556, "Examination of Returns, Appeal Rights, and Claims for Refund," is available online, at https://www.irs.gov/publications/p556. This document will help guide you through appeals and claims for refunds (in case you've overpaid in previous years).
If you do not have satisfaction from an IRS Appeals Conference, you can take your case to the United States Tax Court, the United States Court of Federal Claims, or a United States district court. It's strongly recommended that you follow the chain of appeals and begin with IRS appeal first. So long as you have provided the appeals process with paperwork to prove that you paid the correct taxes, the burden of proof is on the IRS at this point.
If you've filed at a federal court (U.S. Tax Court, U.S. Court of Federal Claims or a United States district court) there will be filing fees and other reasonable administrative costs, which can add up quickly. If you filed with the tax court as a delaying tactic and never went to IRS appeals you risk fines for frivolous filing. If you wind up being the prevailing party, you can request that reasonable administrative and reasonable litigation fees be recovered; the court will decide who the prevailing party is.
If you and/or your professional tax preparer find that you overpaid in taxes for previous years, you can file for a refund. You must file the claim within three years of the date you filed your original tax return paperwork or two years from when you paid the tax.
If your tax problem is causing undue hardship or you have not been able to resolve a legitimate issue with the IRS, you might be able to find help through the Taxpayer Advocate Service. If you qualify for their help, it is a free service. For more information about TAS, visit http://taxpayeradvocate.irs.gov or call 877-777-4778.